Dollar declines as traders resume short bets

Decline moderates after Spain outlook darkens

DeborahLevine

WilliamL. Watts

NEW YORK (MarketWatch) -- The dollar declined versus the Japanese yen and euro late Wednesday as investors reassessed a rally that had sent the greenback to its highest level in more than a month.

The dollar has gained 2.7% against a basket of currencies since the problems with Dubai World's debt were first exposed in late November. Traders are now re-evaluating that move, including a stronger U.S. employment report, and are re-establishing bets that the dollar will fall further as the economic recovery continues and investors get drawn to riskier assets, including stocks.

"We're seeing markets digesting both events and realizing nothing has really changed that much," said Michael Woolfolk, senior currency strategist for the Bank of New York Mellon. "We're starting to see the dollar come back under pressure as a result of short dollar positions coming back into the market."

The dollar index
DXY, +0.56%
a measure of the greenback against a basket of major currencies, declined to 75.987, compared with 76.225 in late North American trading Tuesday.

The euro traded at $1.4737, from $1.4699 late Tuesday. It reached as high as $1.4782 early in the trading session.

The decline reverses a rally in the greenback that sent the index in the past week to its highest since Nov. 3. It had gained 2.2% since late Thursday, the evening before a surprisingly positive U.S. jobs report caused a shift in expectations of when the Federal Reserve could raise rates, giving a lift to the U.S. dollar.

The dollar's loss against its rivals, including the British pound, moderated after Standard & Poor's also lowered its outlook on Spain's credit rating, adding to concerns that sovereign credit problems have not abated after Greece's rating was lowered on Tuesday. See more on reaction to Spain's outlook.

Also, Moody's Investors Service said it may downgrade government-sponsored issuers in the United Arab Emirates, which are either owned by the U.A.E. or Abu Dhabi. See more on Dubai.

The yen and the greenback both gained in Asian trade on safe-haven flows in the wake of Tuesday's downgrade of Greece's credit rating to BBB+ by Fitch Ratings. Read more about Greece's downgrade.

There is no risk Greece will default on its debt, Greek Finance Minister George Papaconstantinou said Wednesday.

In a note, Merrill Lynch expects the dollar to strengthen versus the euro next year as the greenback becomes less correlated with investors' willingness to move into riskier assets, including equities and emerging markets. The euro will fall to $1.28, strategists at the firm forecast.

U.K. pre-budget report

The British pound bought $1.6267, giving up earlier gains and down from $1.6283 on Tuesday.

British Chancellor of the Exchequer Alistair Darling announced new taxes on the banking sector and said the government will need to borrow more than previously stated, but the amount was less than analysts were bracing for. See more on U.K.'s pre-budget report.

Darling, Britain's finance minister, also outlined measures designed to cut the nation's deficit down in coming years from a level equal to around 12.4% of gross domestic product over four years.

The proposals follow the nation's own threats from rating agencies to strip it of its AAA credit because of its deficits.

Still, the pound is declining following the report because new taxes will slow the economy's ability to recover, Woolfolk said.

"Raising taxes in a recessionary environment is a dreadfully ill-conceived notion," he said. "Sterling is going to weaken across the board."

Currency traders' reaction to disappointing economic data in Japan was muted since the figures were largely expected.

Revised gross domestic product data from the Cabinet Office showed Japan's economy grew just 0.3% in real terms in the July-September period from the previous quarter -- less than the on-quarter rise of 1.2% in the preliminary data, and even worse than economists' grim consensus expectations. See full story on Japan GDP.

On Tuesday, the dollar rose to its highest level against the euro in five weeks and gained against other major currencies, as worries about high levels of debt in Greece and Dubai led investors to buy assets that would offer protection in a crisis. See Tuesday's Currencies report.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.